Pandora Is Being Eaten Alive By Its Content Costs

Pandora's content costs are eating it alive. It's not just that
they're huge, it's that they're scheduled to go up dramatically,
MarketWatch points out.

Right now, Pandora forks out a full half of its revenue to record
labels and industry bodies for rights to stream songs over the
internet. The company has said in its IPO filing that it doesn't
expect to be profitable this year or next (and doesn't say when
it expects to be).

Pandora has an agreement with an entity called SoundExchange for
its streaming rights, that goes to 2015. And between now and
2015, the rates Pandora pays are expected to go up by 37% for
songs streamed by free listeners, and by a jaw-dropping 47% for
songs streamed by paid subscribers. On top of all that, Pandora
has deals with other bodies like BMI and SESAC, to which it pays
1.75% and 0.38% of gross revenue respectively.

Of course, Pandora doesn't get volume discounts.

Given that Pandora isn't profitable now, for it to be profitable
by 2015, it needs for one of two things to happen, preferably
both:

A huge surge in revenue per user. But as
a BTIG
Research note on Pandora points out, it's unlikely that
Pandora will be able to monetize its audience much better,
and;

A new deal with the labels. on the one
hand, it would be foolish for the labels to let Pandora die and
it would be terrible PR for them; on the other hand, the labels
have often been foolish, and given their situation are
desperate for cash now, even if it means forfeiting cash
later.